Regarding the Aggregate Demand Curve, what is the Real Balances Effect? A change
ID: 1207007 • Letter: R
Question
Regarding the Aggregate Demand Curve, what is the Real Balances Effect? A change in Resource Prices, Technological Change, faxes. Subsidies, and Regulations The impact on total spending (real GDP) caused by the direct, positive relationship between the price level and the real value of financial assets with fixed nominal value. The impact on total spending (real GDP) caused by the inverse relationship between the price level and the real value of financial assets with fixed nominal value. The impact on total spending (real GDP) caused by the direct relationship between the price level and the interest rate. The impact on total spending (real GDP) caused by the inverse relationship between the price level and the net exports of an economy. None of the above.Explanation / Answer
In that case option c is perfect explanation of the above question.
The impact on total spending (real GDP) caused by the inverse relationship between price level and the real value of financial assets with fixed nominal value-When inflation reduces the real value of fixed value financial assets held by household,the result is lower consumption and real GDP falls.The effect of the change in price level on real consumption spending is called the real balances.The real balances or the real wealth effect is the impact of total spending caused by the inverse relationship between the price level and real value of financial assests with fixed nominal value.
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